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- [00:00]
A
You know, the last thing I'll say is around the size of strategy. That's another debate that you see is strategy is too big. It represents an existential risk to Bitcoin. If you were to think about bitcoin as a corporation, it's obviously not a corporation. If it was a corporation in the United States, someone that owns less than 4% of an asset is not even required by the SEC to report it. It's deemed immaterial from an ownership perspective. That is the current size of strategy to date. They will likely pass that 5% threshold soon, which would mean that they're a material owner, but in SEC terms, kind of the lowest standard for material ownership. So I don't think that strategy represents an existential risk for Bitcoin. If anything, I think that they will help make the ecosystem more antifragile.
- [00:44]
B
Hi everyone. Welcome to Unchained, your no Hype resource for all things crypto. I'm your host, Laura Shin. Thanks for joining this live stream. Before we dive into today's discussion, let's hear a word from the sponsors that make the show possible. Fidelity has been investing in blockchain since 2014. They're not wondering if digital assets will shape the future. They're hiring the talent to help ensure they do. Explore opportunities today@crypto.fidelitycareers.com Fidelity is an equal opportunity employer. This episode is brought to you by Cape America's Privacy first mobile carrier. Same premium service you'd expect from any other carrier and but designed so your number, your location and your data actually stay yours. Get 33% off six months at Cape Co Unchained. Quick plug before we keep going. If you want crypto news without the hype, subscribe to the Unchained Daily. It's our free morning newsletter. The day's most important stories explained clearly in a few minutes. Sign up@unchained crypto.com newsletters. Today's guest is Matt Cole, chairman and CEO of Strive. Welcome, Matt.
- [01:57]
A
Hey, Laura. How you doing?
- [01:59]
B
Good. Excited to have you here. The last day. Yeah, yeah. The last day of trading last week was, as you called it, quote, the most difficult day in the history of digital credit. STRC traded as low as $82 and $0.50 and SATA traded into the low 90s. This all comes on the heels of a month of drama in which the world of bitcoin backed for petrol preferred stocks and was the topic of discussion in many corners of crypto Twitter. We're going to dive into all of these events and the debates around all that. But before we do, why don't we just have you introduce your company, Strive, and your main product SATA, and then explain a little bit about why you call that your main company a product, despite the fact that Strive is a bitcoin debt.
- [02:45]
A
Yeah, awesome. I will dive right into it. So Strive right now is the seventh largest Bitcoin company. We're getting close to 20,000 bitcoins. We're probably, on a percentage basis, the fastest accumulator of bitcoin in the industry. And really in the depths of the bear market, you've seen two bitcoin treasury companies accumulating what I would say at a meaningful scale and its strategy. And Strive, and notably, both companies are the companies that have gone all in on digital credit. So it makes sense that in the depths of a bear market, that is the topic of discussion, of debate amongst the industry and how even you and I kind of came to have this conversation of even potentially having this conversation was around some of the discussions and critiques of digital credit. And so you mentioned my tweet and what you'll find with Strive is that we're a very transparent company. We put out podcasts. I'm not aware of another company that has weekly podcasts where we go out and discuss the risks, the opportunity, what we're seeing in the market. And so when you referenced that tweet about me mentioning that last week was the most difficult week in digital credit, it was a continuation of that transparency. We're just out there, we're talking about what we're seeing in the industry. And our view on, on digital credit actually is that it solves one of the biggest problems in at least America, probably the world right now, which is the retirement crisis. And so my background, I came from a pension. I've been all in on helping solve the retirement crisis for everyday Americans. And what we see is that there is an income problem. And we've seen this for years, the 6040 portfolio being dead. My view is that the 40 portfolio, 40% of portfolios, and most people, the income portfolios, there's just not a lot of attractive options. And what you see when you go out and talk to everyday people is that there's an aversion to volatility. And I really want to get into that because I think that what's interesting about a lot of the critiques is that when you go to the perspective of the non bitcoiner, the critiques there are literally almost the exact opposite that you hear from the bitcoin community, which is interesting. Because you could almost just have the critics debate each other because they say things that are actually the exact opposite. But what you'll find from us is we're trying to just actually get out there and talk about the actual risks that we see. For me, the primary risk here is critical credit risk, which is why we call these instruments even digital credit to begin with is because they're not risk free, they have one primary risk. And, and I think that, you know, I think that, you know, some of the people that are critiques on the bitcoin community will say, well it shouldn't be called digital credit. But then when they talk about the risks themselves, most of the risks are actually credit risks. And so I think I'm more interested in having the more intellectual debate about the risks, the opportunities, how these issuers kind of see themselves. And, and just as an, as another point of how we see ourselves is that we are underwriting a multi decade investment opportunity around Bitcoin. And so some of the critiques that we also hear is more focused on is a single transaction accretive, is it dilutive, does it make sense? Is the strategy broken? But when you think about any long term carry trade, so just I view we're put, we're a structured finance company, we're putting on a carry trade. Carry trades are not risk free and they're not cost free. Right. And, and I think we all agree that there's costs and there's risk to these things. And so when I see things happening like right now, strategy, raising cash, to me it makes sense in the depths of a bare market, a common equity that's designed to trade and behave like amplify bitcoin exposure. It's not magic, it's just structured finance that amplification amplifies returns to the downside and to the upside. Right? And we're underwriting a long term bull thesis around bitcoin. And so the company's really taking actions to support the long term health of the company, whether you're strategy, whether you're strive. And I think the strategy is working. And so right now you're seeing both strategy and strive fund operations primarily through issuance of common equity. That's a good thing. And I'll say that's a good thing. Because when we underwrite the risks of these strategies, we're actually underwriting them as if capital markets are shut. And we either only have our cash reserves or in strives, STRC reserves or Bitcoin, our balance sheet to fund operations. But what we're seeing Right now in capital markets is that capital markets are open. They're open in a major way. You see that in things like the, the SpaceX IPO, the largest IPO in capital markets history, that even though we're in a bitcoin bear market, capital markets are open. I think you've covered this. But BNMR raised a preferred equity in the depths of a crypto bear market as well. And so when capital markets are open and we can get into different metrics if it's helpful, but, and the company has an EVM NAV greater than one and that's different than a, than a market cap M nav and we can talk about the different KPIs and why we use them, but when the EVM NAV is greater than 1, the cheapest source to finance that capital is actually through common equity issuance. So that keeps the company liquid, it keeps our, our reserves ample and allows us to kind of flourish a can you buying in the depths of a bear market. And so the last thing I'll say is that strive we actually introduced, we were the first company to introduce the concept of a cash reserve around preferred equity when we IPO'd SATA. So we started with a 12 month reserve. We currently have an 18 month reserve. And 18 months is not a random number, it's actually a very intentional number. And the reason 18 months is 18 months is effectively the longest bear market in bitcoin's history. And so again we're in the business of underwriting risk, right? We're not looking to have a risk free company. But in underwriting risk, our belief is that that is more than ample reserves to cover any, any in depth bitcoin bear market. So I think the strategy is working as intended. But understand that people that are kind of coming from the outside and looking at this, it can be confusing. I mean even as an example, Unchained this morning it had an article that incorrectly characterized strategies bitcoin buys. And I don't think these are malicious. I just think you have this deluge of information coming out there and you have people that are not listening to our podcast every week. Our largest institutional investors, which by the way are Fidelity Capital Group, people like that, you know, manage trillions of dollars. They listen to the podcast, a lot of the institutions listen to the podcast. They're not confused. But I think people on the outside looking in get more confused. And my belief is let's engage in the conversation, let's engage in the debate. People don't have to like the opportunity But I don't think there's any funny business and that's why we're showing up. And even after the worst week in our history.
- [09:50]
B
Yeah, yeah. I mean, normally when there's negative news about somebody, that's really what qualifies as news. When things are going great, it's not news. And so that's when I reach out. And usually people, not usually, but a good portion of the time people don't want to chat. So kudos to you for coming on the show. So just to fill in more of the history, so you know, you started SEDA with an interest rate at 12%, it's now at 13%. And I'm sure you've heard this criticism about, you know, kind of how that mechanism works. And I'd love for you to describe to me a scenario in which you would lower it in a way that would not cause the price to fall below par.
- [10:35]
A
Yeah. So let's talk about overall capital markets because I think it should be really instructive. So when you look at a preferred equity instrument, just if you look at standard preferred, so let's say bank preferred, this thing like that, there's really two primary risks. One is interest rate risk, one is credit risk, and those two risks determine how the instrument trades. When you go to traditional finance markets, fixed income markets, and you look at the world of high yield, I learned this story when I was at CalPERS that high yield investors, they don't look at the duration, they don't look at the interest rate, they're focused almost exclusively on the credit risk because it's high yield, the credit risk is the driver of, of the actual yield or the price moving up and down much more than, than the actual interest rate movement. So I don't view things like SOFR to be a driver of or a significant driver in where what the pricing is for SEDA or Stretch, because the credit risk is so much beyond sofr, the, the movements of SOFR are almost immaterial to the overall return profile of the instruments. So why do I say that we're in the depths of a Bitcoin bear market. So when you think about a company that's primary instrument is around credit risk when bitcoin goes down 50%, when bitcoin is down at the 200 week moving average, I would suspect. And so I say I would suspect because if you rewind to November, when we IPO'd SATA, Bitcoin was still well above $100,000 a coin. So at the time it was what would we suspect now it's what have we realized. I would suspect that in the depths of a bear market, the credit risk, the credit spread of digital credit would be at its widest amongst the entirety of a bitcoin cycle. That would, you know, if capital markets, you know, efficient markets hold, that would make sense. The credit risk is the most risky in the depths of a bear market. That is not a statement that the bottom of bitcoin is in. Although I'm pretty constructive on bitcoin here. We don't, we don't make a prediction on those things which is why we've underwritten, you know, our company to be able to survive even a repeat of like 2022. So that'd be Bitcoin going down to $40,000, not moving off the 200 week moving average till like the end of 2027. We would not have to sell a bit, a single bitcoin if that site, if that replayed. But the point being is that yes, I would expect that we would generally be in a regime that would be tilted towards rising interest rates for our security. In the depths of a bitcoin bear market that is expected. And so we've raised it a few times. The security I would say has done really well. If you look at the total returns of SATA. And we could do the same with stretch, but I'll just focus on SEDA for a second because it's our security. It obviously IPOed it if you're following at a substantial discount to par. But let's just say the investor bought it at par at $100 when it was first issued, then the interest is substantially greater than the price decline. So in the midst of a 50% decline in the price of bitcoin, the total returns of digital credit has been positive. And so the whole concept around the securities of strive, so our common equity asst, our preferred equity SATA is that theta will have less volatility than bitcoin, substantially less volatility than bitcoin and higher income and high income, high yield and liquidity. And then the common equity will be the volatility absorbers so have more volatility than bitcoin. And I would say that that's worked. And these two instruments work in conjunction with each other as long as an overall bitcoin thesis of bitcoin going up over the long run plays out. And so when I say over the long run, I mean I don't think we're going to have four or five year cycles in the near really anytime soon. Where Bitcoin has a negative rate of return. I view the debasement trade to be in full force. I see the fiat currency debasement crisis not getting any better. I don't think WARSH can fix these things. And so it's really just two different instruments that have two different risk and return profiles around Bitcoin. And I would expect, like I said, the credit spread to go up in bear markets. In bull markets, I would expect it to go down. The last thing I'll note is that we're in Bitcoin accumulation mode. There's been so much demand for SEDA over the last few weeks. I mean, even today we announced a 700 Bitcoin buy, which is really large for our company, driven by SATA issuance and SATA demand around daily dividends. If we were focused on reducing the return or reducing the yield of seda, we could do that. We could actually issue less SEDA because there's been so much demand and actually start lowering the yield. But our view is that we want to be in max accumulation mode in the depths of a bear market and the markets are giving us that opportunity so taking advantage of it. But I would expect the credit spreads to kind of work, you know, opposite in the bull market that we'd be able to reduce them as, you know, the credit worthiness of the company is increased.
- [15:40]
B
So it's. It basically sounds like you are saying there's probably two different types of investors in Bitcoin. One of them maybe just has a shorter time horizon. And so those would prefer SATA because the long cycles of, you know, Bitcoin's volatility would just make it harder for them to. Yeah, just for that time, short time horizon to, to maybe match up with, you know, whatever their needs are. But you know, for other investors who have that longer time horizon then this, you know, the basic stock would be kind of their asset. Is that sort of how to think about it.
- [16:21]
A
That's fair. So. So on the common side, I would say if your view is that Bitcoin will go up on average over the course of a market cy greater than our cost of capital. So let's just say simplistically greater than 13% a year, you would expect our common equity to likely outperform Bitcoin over the course of a market cycle. And because it's not magic, go down more than bitcoin in any bear market. Right. Because there is amplification around this equity that there's no hiding that you would think it should it just amplifies returns in both directions. On SATA side, what we find is that most SEDA buyers. I've never met someone that's told me I sold bitcoin and I bought Seda. I've never met a single person. Is there probably someone? There probably is someone, but I haven't seen that. What have I seen? In practice? We've seen institutional demand. On the retail side, it's generally been accredited investors investing a few million dollars and pulling from traditional income polls, pulling from real estate investments. We've seen several examples of people actually selling a real estate investment that they've owned on kind of like a small level, buying a million dollars of seda. Those are kind of the anecdotes of the things that, that we're seeing. People that, that are, that are smart, that are, that have a lot of money to invest on an individual level and find and are generally, I would say they're, they're optimistic around bitcoin, but they just don't want that volatility profile. Someone that's in their 60s that maybe has owned a rental property for years and is tired of doing the work and says, I think bitcoin's going to go up over time, I think gold's going to go up over time, but I would rather have a higher likelihood of just getting a double digit return than all of the potential return of bitcoin and all of the volatility profiles. So those are typically the people that we're seeing by the security. And I think that when we talk about the pipeline, there's people as an example that are stable coin holders overseas that hold stable coins for whatever reason and are interested in holding digital credit. So just people that are holding, whether it's traditional income, whether it's a cash like security. And when I say cash like security, I don't mean because that it's money that they're looking to spend tomorrow or next week, but it's that they're comfortable in holding. They don't want the full risk and volatility profile of Bitcoin. They want something a little bit safer on the structure. And that to me is why structured finance exists at all. Because different people have different risk and return hurdles. And that something like SEDA makes a lot of sense for a portion of that income type bucket, no matter what the income security that people are invested in is.
- [19:18]
B
Okay. And then to go back to my question before about, you know, what would happen when you reduce the interest rate on SATA, you know, you said that you felt you could probably Lower it in a bull market. Is that okay?
- [19:32]
A
So, yes. So I just think the credit spread will. Will run the opposite of the bitcoin cycle. And so this would. This would have been, you know, what our expectation was when we launched SATA, that as bitcoin goes down, the credit spread, the spread over SOFR would expand because the companies become more risky and vice versa. So that's point one, and point two is that as a company, we have a decision of how much SATA do we want to issue. And so the more Bitcoin that we want to buy, the more amplification that we're comfortable with, the higher the credit spread will be, just like any company. And we use amplification versus leverage just to note that it's not debt. Right. But for some, and this kind of gets into my background a little bit, and where I think some people kind of get too turned around is that even in institutional circles, I probably spent several hundred hours debating what leverage is. At Calpers, right? The largest pension fund in America, you would think leverage is leverage. No. There's all sorts of different concepts around leverage. There's all sorts of different calculations around yield. There's all sorts of different calculations around duration. And so the notion that there's a single definition that tells a full story for anything in structured finance is simply just not accurate. Right. And so that's why you get into the need to have all these different definitions. But for simplistic purposes, if your audience wants to call it leverage, I don't really care. Right. Like, like, bottom line is the more preferred equity that we want to have out there as a proportion of our bitcoin stack, likely the higher yield that we'll have to pay as an issuer. But we might be okay with underwriting that risk, depending on our future view of Bitcoin. And so to my point, and where am I going with this, if we wanted to reduce the interest rate, we could reduce the interest rate by having a lower amplification ratio. We could reduce the interest rate by likely having more cash on our balance sheet. We could reduce the interest rate as the credit improves. In a bitcoin bull market, all of those things are things that we could do to reduce the interest rate. Um, it would just depend on if the company actually wanted to. So I'll give you an example. Now, I don't think the company would do, as we don't have any plans to do this, but let's say we wanted to. We could sell bitcoin, buy back SATA, push the price up into par, reduce the interest rate as, as, as, as, as it goes down. And, and anybody that sells could get effectively par for it because we would be the buyer of this security. We don't want to do that because we actually want to have a higher amplification ratio because we're very constructive on what Bitcoin's going to do over the course of the. My point being though, is that we have several levers that we could pull if we actually are focused mostly on reducing the interest rate. We're focused more on buying Bitcoin right now though.
- [22:20]
B
Okay. And then is there a max interest rate that you would not be willing to go over?
- [22:25]
A
So, so in the documents for state of the maximum interest rate is 20%. So that is the, the absolute max as part of the document. Our view is that Bitcoin is likely to have about a 30% CAGR over the next 10 to 15 years. We think that in Bitcoin's maturation process there's another 10 to 15 years of what we call the digital gold rush era, which effectively means that with our thesis that there really is within the documents of say, to no interest rate that is too high to underwrite the thesis that we see. And if you think about anything with regards to CAGRs, which is the annual rate of return, your assumption around the annual rate of return into the future will be the highest in the depths of a bear market. Right? Like if bitcoin in a couple years from now is at $300,000, let's say, and you have me back on, it would be harder to lean into the higher end of the CAGR assumption than when we're at the 200 week moving average. Right? Because that is just how markets work. So I would say we're not anywhere near how high we would feel comfortable taking SATA. But I, but I'll say that like, that it's not just a calculation of what is Matt or what is Strive comfortable doing or what is Michael Sailor comfortable doing. Right? Like you have to actually be part of the markets, listen to the markets, educate the markets and react to how the market reacts. Right? Because if the market has a fundamentally different view of the risk than I have, then I have to take that into calculus for our decision making process. Right? And so I say that to say that, you know, maybe 20% wouldn't be achievable based on what the market would perceive to be the credit risk, but from a underwriting perspective, I think that we could take it up to 20 if we had to that said, I think the actual demand that we're seeing for SATA has been close to insatiable. Where we've had so much demand, it's been more of a problem of that versus a problem of, you know, not having enough demand and having it depaying in a major way. And I think that's because of the simplicity of our capital structure. And we have no debt. We have 18 months of dividend reserves. We have a lot of liquidity on both SATA and asst. So if you actually look at the liquidity on the common per Bitcoin, we have the most liquid stock in the entire industry. If you look at SATA, SATA per share is more liquid than stretch. And so I just don't think that we're anywhere near these, you know, kind of death spirals that people are concerned about. I think the actual thing that we're seeing is the exact opposite of that.
- [25:01]
B
Okay, so in a moment we're going to talk about last week's gyrations in the world of digital credit. But first we're going to take a quick word from the sponsors who make this show possible. Fidelity has been researching and investing in blockchain since 2014, long before it was a headline, and they're hiring crypto and defi professionals to join their team and discover what's next in finance. Fidelity is looking for people with fresh perspectives from different backgrounds, whether it's tech, UX or product design, whether you're crypto savvy or crypto curious, as long as you have the passion to make a real impact at a company striving to make finance accessible to all. Explore crypto careers at Fidelity today and make the decision that could change your future for the better. Visit crypto.fidelitycareers.com to learn more. That's crypto.fidelitycareers.Com Fidelity is an equal opportunity employer. If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T Verizon and T Mobile have been breached again and again, and SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Kape comes in. America's privacy first mobile carrier, same premium service, but Kape rotates the identifier on your sim and every 24 hours, deletes your call and text metadata after a day and protects against SIM swaps with a 24 word recovery phrase that only you control. You also get two middle to end encrypted secondary numbers for banking and signups so you stop handing your real number to every app that asks. Go to Cape Co Unchained and use code unchained for 33% off your first six months. Before we dive back in, a quick word about something we make ourselves. If you like the way we cover crypto on this show, clear eyed, no shilling, just what actually matters. You'll like the Unchained Daily. It's our free newsletter that lands in your inbox every weekday with the most important stories in crypto written by journalists, not marketers. No jargon, no hype, no number go up cheerleading, just the news. You need to stay ahead in the time it's takes to drink your coffee. Subscribe for free@unchained crypto.com newsletters. Back to my conversation with Matt. So let's talk about last week. We saw SATA dropped down to the low 90s. And again, this references the tweet I mentioned earlier where you, you know, said that you thought that this was a leveraged liquidation event. You said that you thought there were holders who had borrowed against SATA. Explain what you think happened.
- [27:42]
A
Yeah, actually I think it was more con, more on the STRC side, but I'll explain what we saw. So we, we heard people over the course of several months, and probably some of your critics would cover this too, talk about people using leveraged strategies around digital credit. So whether it's STRC or SATA, mostly strc, just given it's a much larger preferred equity instrument than SATA. And, and concern has always been that I think when you, when retail starts using leverage, it does not end up well. And that's been true throughout the history of crypto. Whether you're talking Bitcoin or Ethereum, the days of perpetual per. The perps on Bitmax or whatever you're calling it, right? People take too much leverage and things end up poorly. And then you combine that with even some of the strongest fixed income instruments. So one of the, some of the biggest hedge fund blowups in history have been around Treasuries, leverage around US Treasuries. And so it's not really a function of the underlying credit, but you take people using leverage. And then we were hearing anecdotes of a few people actually being liquidated. And then when you looked around the volatility profile, sorry, the volume profile, not the volatility profile of strc, what you actually saw was very little volume, actually just like low volume as STRC was trading weak from call it 100 to about 90. And then on last Thursday when it went from 89 to 82 and a half, and then basically right back up to almost 89 and closed the day almost unchanged. You saw volume explode. And so when you combine the fact that we know people were using leverage on these instruments, a few anecdotes of people actually being forced, liquidated, and then a very elevated volume profile into a liquidation event, you combine those things. And the only thing that I think makes sense is a liquidation event. And that's why you saw such a steep decline and a steep recovery. And that's not to say that there was not some underlying weakness in digital credit. Right. I started off by saying that STRC had moved from about 100 to 90 or 89 with very little volume. So I don't think that initial weakness was driven by a liquidation event at all. And it's just around providing data to what we were seeing. And when you look at SATA, the story around SEDA was actually very different. And so throughout the. Throughout all of last week, Monday through Wednesday, SATA was actually at a hundred Monday through Wednesday. And then on Thursday, it dropped to the low 90s before recovering around $97 or so. And what you saw with SEDA was a pretty consistent volume profile Monday through Thursday. So what that tells me is that there was really no evidence on SATA of an actual liquidation event. What we were hearing anecdotally with SATA was that when stretch dropped down to 8,250, that you had some people selling SATA to buy STRC just because that dollar price differential had exploded to such a large degree. And so I think that makes some sense that people would look at these from that perspective, given that the underlying risk to both is bitcoin. But I think it was, you know, to my point, underlying weakness driven by a liquidation event. And that's what we saw. And that's just. That's just data out there just for people to digest. Doesn't mean that, you know, things are broken. It doesn't mean that things are perfect. It's just when we see data that's interesting, I wanted to put it out there to help educate the market of what's going on.
- [31:23]
B
Okay, well, yeah, so since you kind of focused a little bit more on STRC there, let's talk about that. You know, I think that you may have heard some guests on my show talk about how they feel like strategy. And it doesn't even have to be on my show. There's, you know, plenty of commentary on crypto, Twitter, you know, people saying that they feel like strategy has fumbled its decision making. You know, at the start of the year it had over $2 billion with which it could have used to, you know, pay down its dividends for a good long while. It ended up paying down some bonds that were not due until 2029. And so then it was left with only about six months of reserves with which to pay the dividends. And the bitcoin price began falling. STRC began degging. Then they sold 32 bitcoin. It wasn't a lot in dollar amounts, but that was at least correlated whether or not it, you know, caused a further slide in the price of bitcoin. And then, you know, I see people now calling out Michael Saylor saying that, oh, he's changed the language. You know, he used to say strategy would never sell. Now he's saying there will never be net sellers. And people, you know, are kind of adding all this up to saying that this indicates a series of missteps by strategy and that now that it has this, you know, more complicated capital structure than what it started out with, it is more of a situation where investors really need to have confidence in their decision making. And that's partly also why, you know, the, the prices of these assets are faltering. Do you agree or disagree with those criticisms?
- [33:03]
A
I, I think that there is some truth to it, but I think that there's a foundational misunderstanding or, or a different viewpoint that a lot of these critics look at. And I'll get into it, and I'll get into it right now. So where I agree, I agree that a digital credit issuer should, should have and try to maintain substantial cash reserves. And I mean, that is true since day one when we IPO'd say that we were the first to, to have a cash reserve. We had a 12 month cash reserve to start. We now have an 18 month cash reserve. Right. We have been consistent in the viewpoint that a cash reserve makes sense. And, but, but also, like I say, where I would I differ from them, that some of the critics is that we've also been consistent since day one at the company when we, I, when we IPO'd SATA, that we would be willing to sell bitcoin if we needed to strive, has never a single time said we will never sell a bitcoin. My view is that these are total return trades, they're structured finance trades over the course of decades and nothing should ever be off the table. That said, I do think we're in a digital gold rush era around bitcoin and that we want to accumulate as much bitcoin per share and in aggregate, but really per share that we can over the next 10 to 15 years. And so you're very likely to see us be a consistent net buyer of bitcoin at least for that amount of time, maybe longer. And so, you know, I think for, for strategy, I view it as a positive change when strategy came out and said we are willing to sell bitcoin if we need to. When I and you have to react to the data that's out there. So what is data that's out there? That in my view was important new data that evaluated a new framework perspective from strategy. When S and P came out with their rating last year for strategy, they stated that they gave zero credit for the bitcoin. And so I know some of the people on your show have talked about why strategy has a junk rating from S and P. But when you actually read the methodology and they say they did not give literally a single penny of credit for the bitcoin, Strategy has over 800,000 Bitcoin. Like when I talk to actual institutional buyers, trillion dollar asset managers that have positions and strategy and strive, they think that that's a joke. They actually just completely write off S&P's rating methodology because they don't give credit to the bitcoin. Now, To S&P's credit, when you look at Basel frameworks and, and you know, the financial kind of, whatever you would call it, regulatory bodies, it makes sense to me why S and P today might say we give zero credit to the bitcoin. But when you put it in the perspective of an asset manager that's actually tasked with underwriting the credit risks of these agencies, like I can literally go on a call with a trillion dollar asset manager, say S and P gave strategy a B minus writing. Look at it, they gave zero credit to the bitcoin. Do you agree with me that there should be some credit to the bitcoin? Every single person says absolutely, the, the credit, the rating is too, too low. And so they instantly internally uprate the rating of strategy relative to what the rating agencies give. But when S and P says zero credit to the bitcoin, it actually is important for strategy to say, hey, we, if we need to, we're willing to sell the bitcoin. Let me show you that. You know, I, I previously said these things. If I had to, I'd be willing to do it because ultimately, you know, for large institutional adoptions, outside of more of the fast movers, but more of the slower movers within Institutions, they're going to want to see a higher rating. And a higher rating can only happen if the rating agencies start to give some real credit to the bitcoin. And so part of it is showing that the bitcoin is real capital, it's usable capital. Another part is actually working on Basel Frameworks, which strategy has been someone that's doing a lot of work on it. We're doing a lot of work on it. Organizations like the Bitcoin Policy Institute are doing a lot on it. And so this is not politics. I would never want to judge a CEO for saying, you said one thing in the past, never change it in the future. Even when new information and new data puts itself out there. I'd actually want the opposite, that when new data comes out there, that frameworks are adjusted ultimately to maximize the total returns of mstr. And so I think it's to the benefit that they are now showing that they're willing to sell bitcoin. And then, you know, I think second secondarily, but I don't think that they really need to sell a lot of bitcoin. Their EVM nav is still at a multiple to one, which means that it is less expensive from a cost of capital perspective for them to issue the common, to fund things like the dividend reserves and to sell bitcoin. And so I don't think that it's likely that they even need to sell substantial bitcoin. But I think it was a, it was a positive for them to do so. And I. And is it a. You know, it was Michael Saylor lying? I don't think he was lying. I think the, the truth is, is that new information emerged. He updated his framework to make strategy work the best for all of their investors. And part of that was needing to show that he was serious. And, and you know, anytime he sold, clearly a lot of people were going to freak out. And the fact that they freaked out about 32 bitcoin, I think kind of proved the point he needed to do something.
- [38:24]
B
Yeah, well, so where I would disagree with you on that is I think that their mission very clearly from the start was only to accumulate and never sell. And you know, he reinforced that for many years. And then it was only when they started, you know, kind of changing the structure and adding all these preferreds that then in a way their mission changed. And so I agree that he needed to do it just because for the current incarnation of strategy, it is true that, you know, it is better for them to have a philosophy similar to strive where they would, you know, never claim that they would never sell. But it is true. The critics are right in that it is a change. You know, for the first, I agree,
- [39:04]
A
I agree that it's a change. You're, you're not having me disagree that it is a change in kind of how it was being spoken about. I think to me the most important question is does that change over the course of the next several years increase the amount of bitcoin that strategy were able to purchase? And I think the answer to that is yes. And if the answer to that is yes, then even though it is a change, it actually better helps them achieve that long term bitcoin goal of accumulation. So I feel pretty strongly that that is true. I think that's why they've gone down the route of preferred equity. But you know, no, no disagreements that it is a change.
- [39:47]
B
Yeah. So you referenced there the announcement today they raised another $335 million by again sharing common stock 2.7 million shares and an at the market offering. And I wondered if you thought that would quell the concern about strc because as we speak the price has only recovered to $88.79. And I was wondering if you thought it would eventually reach par or if you had an explanation for why it hasn't yet.
- [40:17]
A
Yeah. So if you look at previous stress events in digital credit, so in the early days of seda, actually if I'm going to pull it up real quick just so I get the dates right, in late January, SATA actually went from over $100 per share down to 81 and then eventually back up to 100. Okay. So we've seen within digital credit similar type sort of drawdowns. And it took a couple months after SATA drew down for it to actually pull back up to par. And so it doesn't mean that history will repeat, but I don't think that it was necessarily obvious that Stretch should move back to par in a day. In fact, actually, you know, stretch it, it kind of wobbled down from 100 down to 90. It'll eventually get there. I think strategy could do nothing and it could get there. I think bitcoin having some strength would help it move up quickly. Strategies increase in cash. I think they still are a little under one year of cash reserves. And Saylor made comments that they're going to continue to add cash to increase the credit worthiness of, of strategy and for stretch. And so I think those will be corporate actions that we'll see. And I think that it would be prudent for a company like strategy to not overreact, to not overrush it. Because I think a misconception is that STRC or SATA is pegged at 100. The key distinction there is that they're more par seeking where the issuer takes steps, deliberate steps over time to try to minimize the volatility and ultimately hopefully bring the security to 100. And when it's at 100, this, the issuer is very likely to issue new shares by Bitcoin, but that in the interim that there will be bouts of volatility. And so I think strategy will continue to add cash, not overreact and issue way too many shares in one week to boost, bolster their cash reserves or do an emergency 100 basis point rate hike. They're going to act deliberately over time to support the security. And I think that's ultimately the value maximizing approach. But it's likely approach that, you know, might take, you know, a little bit of time. But you know, depending on what Bitcoin does, it could be faster or it could be slower.
- [42:40]
B
Okay. And before we circle back to just talking a little bit more about strategy itself, I did want to ask a little bit more about SATA. So you. So Seda is actually invested also in strc. Strive invested $50 million of its corporate treasury, more than a third of its total treasury, the strc. So why did you invest in a competing product? I'm going to ask two questions and also do you feel like its investment in STRC was part of the cause for the DPEG in SATA last week?
- [43:14]
A
I don't think that to answer the second part first, that it played any role in the DPEG of SATA. And the reason is, is that we have about $50 million ish, actually under 50 million at this point in STRC. And our balance sheet is more than a billion dollars. When you combine the Bitcoin and the cash, the cash that we hold right now is more than three times the value of the strc. So even on the shorter duration, more liquid bucket the cash and the STRC, it's more than 75% just cash. And so I don't think that it's material enough to cause an impact on, on SATA itself with regards to how we think about structuring the overall portfolio. It's actually very similar to how we would talk about anybody think about it thinking about their own portfolio of assets. And part of it is your shortest duration. Live assets should be in cash. If you know, you need to Pay something off tomorrow. It should be in a, basically a cash and actual money market, a fund, which is why we have a bunch of cash. And we've always called digital credit a medium duration instrument, even though the issuer is taking steps to peg it around par, which is meaning, which is why behind our cash is strc. Before you get to the Bitcoin, this is kind of different layers where cash will be the least volatile, STRC will be the medium. Volatility, obviously more volatile than cash. And, and then bitcoin has a lot of volatility behind it. And when you combine those, I think there, I, I, I view that as a fortress balance sheet. Obviously all the, the STRC and the bitcoin is correlated to Bitcoin. Right. Like, I mean we're a bitcoin treasury company. We are in the business of underwriting bitcoin risk. But there's different types of risk that an issuer could face. And so one risk is the price of Bitcoin goes down. Right? Right. We're in that risk scenario right now. Importantly, capital markets liquidity is open. Right? We are buying Bitcoin as we speak. We are issuing more shares to buy cash as we speak. Equity markets are really strong. And so in that version of the world, things just aren't broken. There's different versions of the world where bitcoin could be stronger and liquidity conditions could actually be really poor. So those two levers, they could be correlated, they both fall down together. And I think in the scenario where bitcoin falls and liquidity conditions fall, that is likely a scenario that is like the classic scenario of when the Fed's going to step in and restore liquidity conditions. The Fed will not let asset prices fall when there's no liquidity like, like that. That is what we've seen in every QE incidence. If liquidity conditions were poor, but capital markets were doing okay, the prices are open. That's a more likely scenario where the Fed would not step in. And in that scenario, things like STRC could be a valuable asset for us to have. And so really we're just looking at all sorts of different scenarios trying to minimize our cost of capital. And I'll say like, when you look at different issuers of commercial paper in this, like an actual, like normal corporate America, you'll often see like an auto, an auto issuer. Buy commercial paper of another auto issuer and it comes down to liquidity management and minimizing the cost of capital. But I get why that could be confusing to some, but it's why it's appropriately sized, in my view. So right now it's, like I said, less than 25% of our cash and marketable securities bucket.
- [46:50]
B
Okay, so let's talk about one other recent development. But I do then want to turn back to the whole, you know, controversy. But I, you know, last week you started offering daily dividends on strc and I wondered what prompted you to make this move and whether or not you think SATA's daily dividends and higher dividend rate put competitive pressure on strc.
- [47:14]
A
Yeah, so the move for more frequent dividends was really around reducing the volatility of the preferred equity instrument, the digital credit instrument. And so what we were seeing, and this just makes sense, is that around every dividend event, the price of the security would drop by roughly the price of the cost of the dividend. And that makes sense because in traditional fixed income markets you actually have interest accrual, so it actually accrues into the price. So if you sell the instrument, you get the benefit of partial of that dividend, even if you sell it before the dividend occurs. But in preferred equity, there is no interest accrual. So you're working into that ex dividend date, that record date to collect the payment. And you would expect in markets for the price to move up, then the dividends paid, the price to drop. And so the way that you make that dividend event a non event is to pay it every single business day. And so that was the concept behind daily dividends. And I think that it has reduced the volatility of SATA dramatically. We have, and it makes sense. It just, it's just simply math. And then, you know, the second part of, of your question of do, do I think that Stata is competing with STRC? Look, I think SATA right now is less than 20% of the issuance of STRC. And, and so we're really two different companies with drastically different amounts of capital that we're raising on, on a weekly basis. And, and so is there, you know, small capital flows between SEDA and strc? I think there is just like I think I started out saying we were seeing some people likely buying seda, selling seda, buying STRC because the price differential had expanded so drastically. I think you could also see people selling STRC in between the bi weekly dividend dates, buying SATA to collect the daily dividends and then kind of going back and forth. But ultimately I think that's the vast minority of investors. People aren't, most people aren't trading these back and forth. And there's really, there's no reason that would be guaranteed that those trades would work out actually because you, it would require the price action of both SATA and STRC to act exactly how you would expect. And so I really view these things more as medium duration instruments to invest in. And you'll see a few people trade them back and forth, but I don't think that they're ultimately overly competitive with each other. Which is why if you see both strategy and strive, we're pushing for more issuers of digital credit right now. And so that kind of gets to the nature of where I think we are in this cycle. I want to see investors view this as an asset class. I want to see ETFs built around digital credit. And if you think about even just like any industry, whether you're talking about banking or insurance, like what's the difference between JP Morgan and Bank of America? They're both massive banks. Most people could not tell you a difference. I, I was, I thought I knew the difference and then I got a message from someone that worked at one of those and said, there is no that. And it worked at both of us. There is no difference. And, and so the point is, is that we're so early in this ecosystem that there's more to be built around growing the pie than around actual rough competition between. So in the near term, you know, strive announces daily dividends. It's super exciting flows. Go to SEDA sometime, probably you'll go back to strategy, vice versa. But ultimately the success will be around growing the pie, not around competing with each other.
- [50:48]
B
All right, so last question. Last week there was a Viral moment when 21Capital CEO Jack Mallers questioned Michael Saylor at a conference in Prague last week. And I saw that Pete Rizzo had a really great summary of the like theoretical argument, you know, underpinning the discussion. He said that sailor is quote, building a world where Bitcoin might win financially but lose culturally. In that world, the average person never holds a sat, they hold a wrapper. They interact with a product that happens to be backed by something that happens to be backed by Bitcoin. The sovereignty, the self custody, the peer to peer ethos, all of that gets abstracted away. So I wondered if you thought that investing in vehicles like STRC or SEDA is more like investing in a hedge fund because it requires the investor to have faith in a centralized entity, which is kind of against the Bitcoin ethos, at least, like in a spiritual manner. What would you say to Those criticisms,
- [51:54]
A
I would say we start always with we recommend people have bitcoin in self custody to secure your financial freedom. We're deep believers in that. For people that don't know my story, I went all in on Bitcoin in late 2016, early 2017. Back then I used to listen to your show all the time when I was at Calpers. And I'm a true believer in the freedom movement around bitcoin. And I'm also a pragmatist and I understand where most people actually are. And so most people, they are not equipped to handle the volatility of bitcoin. They tend to, I would say the tourists tend to invest in bitcoin at the peaks of bull markets and they can't ride out the volatility and they sell in bear markets and that digital credit is a better risk return asset for them and it brings bitcoin to them. But the goal is for them to ultimately self custody bitcoin. And then on the common equity side, you look at just as an example, some of our largest institutional investors, whether it's Fidelity, whether it's Capital Group, they have equity mandates. Bitcoin or even a bitcoin ETF is not even in their universe of things that they can even possibly invest in. And they're massive bitcoin bulls, they're institutional smart allocators and they, they are the largest owners of asst, the largest owners of mstr. And, and so we are bringing bitcoin exposure to people that can't otherwise access it, while also trying to tell people that can to actually self custody bitcoin. So I am a believer that a, a a healthy Bitcoin P2P self custody network, people running nodes, is very healthy. It's something that we want to promote. I don't think that strategy or STRIVE represent a risk to that. If anything, I think we help strengthen the network. And I'll give you a concrete example of this. There is major discussions and debates in D.C. around clarity, around de minimis tax exemptions, around the strategic bitcoin reserve. And large corporations like strategy, like Strive are able to play a major role in those discussions that the critics, frankly I never even see them in the conversations. I'm sure that some of them are there at times. I don't want to say that they're never there. But when I say people that are actually helping drive that cause, major corporations help push those outcomes. And so I think the last thing I'll say is around the size of strategy, that's another debate that you see is strategy's too big. It represents an existential risk to Bitcoin. If you were to think about Bitcoin as a corporation, it's obviously not a corporation. If it was a corporation in the United States, someone that owns less than 4% of an asset is not even required by the SEC to report it. It's deemed immaterial from an ownership perspective. That is the current size of strategy to date. They will likely pass that 5% threshold soon, which would mean that they're a material owner, but in SEC terms, kind of the lowest standard for material ownership. So I don't think that strategy represents an existential risk for Bitcoin. If anything, I think that they will help make the ecosystem more anti fragile. But I do think it's fair for people that are concerned about the health of the P2P network of Bitcoin to state that. And my point will be I think Strategy and Strive will be two of the most important companies to help drive that for the decades to come.
- [55:26]
B
All right. Well Matt, it has been such a pleasure chatting with you and learning more about SEDA and Strive chatting about strc. Thank you so much for coming on Unchained.
- [55:35]
A
Thanks for having me.
- [55:37]
B
Nothing you hear on Unchained is investment advice. This show is for informational and entertainment purposes only and my guest and I may hold assets discussed on the show. For more disclosures, visit Unchained Crypto.com. Sa.